Groupon Is Trying, But The Results Have Yet To Show Up

Groupon’s shares tanked following its Q2 2014 earnings announcement. Even though the company showcased improvement across several metrics, the results came below consensus estimates, resulting in a sell off. The outlook for the third quarter wasn’t bright enough to perk up investor sentiment either. In our opinion, while Groupon did make some advancements, it simply hasn’t fixed the issues that have plagued it in the past. The company needs to do better if it has to convince investors that that it runs a sustainable business that is finding acceptance among a growing number of merchants. About 90% of traffic on Groupon’s website is still email driven. This figure hasn’t improved as much as we expected considering the company’s efforts to promote a search and marketplace model in recent quarters. Groupon is trying, but the results have yet to show up.

Groupon continued to make significant strides on its mobile platform. The growth trajectory of cumulative app downloads hasn’t slowed down, with the figure reaching 92 million at the end of Q2 2014. This is important considering that mobile commerce volume has witnessed strong growth in recent years, and Groupon’s business model is such that it makes it convenient for customers to purchase groupons and redeem them using their mobile devices as they visit the merchant.

The average number of unused Groupons per customer declined by 25% compared to last year, which means that customers are redeeming more deals. The number of active customers in North America has grown by more than 19% in the first half of 2014. However, this growth has been accompanied by a slight decline in average spend per customer. This could be indicative of customers buying lesser deals but only the ones that they are likely to use. This isn’t a bad thing for Groupon.

What Does Groupon Need To Do Better?

While gross billings jumped, revenues continued to see a slight sequential decline due to a lesser take rate. This was especially visible in Rest of World results where gross billings exploded but revenues grew relatively slowly. This can be attributed to acquisition of TMON (Ticket Monster). Fundamentally speaking, Groupon still needs to ensure success on two fronts as discussed below.

Marketplaces Model Needs To Pick Up

The blast e-mail of numerous offers to Groupon’s customer base has been questioned for some time. Even though the company is trying to address this issue, there are still far too many irrelevant emails being sent by Groupon to its subscribers everyday. This has hurt its brand image and has diluted the value proposition. It would make much more sense to send fewer emails with a targeted list of deals that a customer is more likely to buy and redeem.

The company sends 250 million emails everyday to its subscribers and this has helped it push upfront sales of groupons. A lot of these groupons tend to expire before a customer has a chance to redeem them. The average number of unused Groupons remained the same in the first quarter of 2014 following a decline throughout last year. This suggests that a lot of customers redeemed their unused and pending groupons in 2013 which may help the demand going forward. However, this also signals undesirable customer experience which will hinder the company’s organic growth. Having relevant deals with minimal upfront sales push is what may bring customers back to Groupon’s portal over and over.

More Users Need To Browse

Groupon needs to ramp up its efforts to encourage subscribers to search for deals and explore its marketplace (‘pull’ strategy) instead of relying on emails (‘push’ strategy). It needs an image makeover, and accelerating such a subscriber shift will smooth out its topline growth and help reign in expenses. In March 2014, around 9% of Groupon’s traffic in North America comprised searches on its online marketplace. The company managed to increase this figure by just 1% by the end of June 2014. This implies that email related traffic still accounts for about 90% of the company’s traffic. Given that Groupon has touted its ‘pull’ strategy for the last few quarters, its progress thus far appears to be a little disappointing. Customers who consciously search for deals tend to spend more and have shorter redemption cycles, which suggests that the company’s operations can get a significant boost if it can accelerate a customer shift from emails to its marketplace.